Trading for everyone
Simple skills for an
easy start
Contents:
Introduction . . . . . . . . . . 2
Trading methods . . . . . . . 5
Trading plan . . . . . . . . . . 16
Managing the capital . .
. . . 21
Market entry principles . . . . 24
Monitoring the market
. . . . . . 37
Conclusion
. . . . . . . .
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Introduction
Today stock markets offer ample
profit opportunities, and trading on
these markets is one of the fastest
ways to prosperity. The risks,
however, are just as high as potential profits. Although if trade losses
were that much greater than the
profits, we would not see so many
active and successful traders.
Some people come to the stock
exchange to fullfil their dreams of
becoming overnight millionaires.
We have all heard real life stories
like these.
Still, it is important to understand
that only 5% of traders really catch
that luck.
2
The other 95% never see astronomical profits.
However, the good news is that their
efforts are still not in vain. Failure to
earn a million in a day is neither a
fiasco, nor a cause for disappointment. Lots of people never make a
fortune. However, they do secure a
stable monthly bonus for their
paycheck for the rest of their lives!
They do not manage millions of
dollars, but they maintain a respectable financial level that affords
them a mortgage-free apartment
and travel vacations three times a
year.
3
Does not sounds too bad, right? And
that is just how well a moderately
active trader can do by trading
several days a week. That is the
level available to anyone who is
willing to pick up trading.
The entry barrier is very low — no
specialized education is required,
and you do not have to kick off with
a massive starting capital. Trading
is for people from all walks of life.
For most of them it is just a lucrative hobby. To get started, you will
have to familiarize yourself with
some basics — understanding the
way the market operates, and how
the trades are made.
4
As your knowledge expands, you
will be able to improve your trading
results.
In this book you will discover the
basics of starting trades, market
monitoring, and searching for the
most profitable conditions. So, read
on and explore the new financial
opportunities!
Trading methods
First, you will have to pick the stock
exchange where you will start
trading. Your options are:
• foreign exchange, where various
currency pairs are traded.
5
• stock exchange — a platform for
operations with stocks, obligations,
and other securities.
• commodity exchange is a place
where you can trade in goods and
raw materials, including oil and
gold.
• derivative markets, where futures,
options and other financial instruments are traded.
Each of those options has its own
unique features, pros and cons.
Choose the one that is right for your
starting deposit volume and the
goals you aim to reach.
Each of those options has its own
unique features, pros and cons.
6
Choose the one that is right for your
starting deposit volume and the
goals you aim to reach.
However, trade on all these
platforms follows the same basic
principles. You should learn them
before you start trading. Let's review
them one by one.
There are three main trading methods:
1. Scalping and day trading
2. Medium-term trading
3. Long-term trading
Beginner traders often flock to the
day trade. From psychological
perspective, it is no wonder why:
beginners always want to make a
quick buck.
7
That is the reason why so many
beginners immerse themselves in
indicators, day forecasts, and
trading within shorter timeframes.
Let us now review each type of
trade:
• When scalping, choose pairs with
a smaller spread for trading. Spread
is the difference between the best
purchase price and the current price
of the asset at a specific moment.
Highly volatile assets can also bring
in a big score. Volatility is a range
where the price on a specific asset
oscillates over a specific period of
time (day, month, week, year).
Volatility is what allows you to make
a profit when the market turns.
8
When scalping, it is necessary to
schedule around the times of publication of important macroeconomic indicators or reports of representatives and heads of central banks.
• Day trading implies opening and
closing a position within a single
trading day. It's applicable to most
intraday timeframes. This tactic is
different from scalping — oscillations of take profit and stop losses
are much bigger. What does it
mean?
Traders commonly employ stop
orders when they trade. You can set
stop orders to open and close deals.
Stop loss and take profit are two
important algorithms for closing
trades.
9
Stop loss reduces your losses. It
closes the trade automatically when
an asset reaches a certain pricepoint where it is no longer profitable
to the trader. It's a good defence
against the course that jolts the
wrong way.
Take profit, in turn, fixes profit at a
certain level. Take profit is a direct
order for the platform to close a
trade automatically when a certain
price is reached and a predetermined amount of profit is thus
secured.
This kind of order helps a trader to
fix the profit volume and cut losses,
ensuring stability of the trade result.
10
Working with stop orders should be
considered the main principle of
effective money management. They
allow a trader to secure an expectedly good result without checking
trades manually every hour.
For day trading, it is recommended
to schedule around the time of
news releases and change of
trading sessions. The same applies
when American traders start their
operations — specifically, time when
Europe is still trading, and America
has already started.
This method is favoured by novices
and professionals alike. Closing all
positions within a single trading day
has obvious advantages for beginners.
11
That's how one protects themselves from risks of overnight situation changes and incurring losses.
Further acquaintance with classic
market analysis methods will help
you simulate an overall market
picture over longer periods.
• Medium-term trading implies
being in an open trading position for
one to several days, or even a
month. This approach takes the
elder timeframes into consideration. These are timeframes of four
hours or more.
This method has a distinct advantage: adjustable ratio of mathematical expectation of profit to potential
risks.
12
This method has a much higher
profit potential than day trading.
When you do midterm trading, you
can participate in trade movement,
which is what you cannot do with
day trading. Medium-term trading
allows you to sit out the news
release in an open position, protect
a portion of the profit, and then add
to an already open position during a
trend movement. Combined, all
these things increase trading
efficiency.
• Long-term trading is rarely used in
foreign exchange market; it is more
suitable for stock market. However,
if a trader understands inter-market
relationships and can use fundamental analysis,
13
the strategy will be useful to them
in currency market as well. In this
type of trading, trades last from
several months up to a year. When
using this method, swap size for the
yet-to-be-opened positions should
be taken into account. Let us see
what it means.
Any transaction of purchase and
sale is accompanied by a corresponding resale or repurchase. At
the same time, a stake is placed on
increase in exchange rate of the
main currency and a decrease in
quoted one. The same applies to
stocks and other financial instruments.
14
The size of that stake is called a
swap. In long-term trading, this
indicator should be determined in
advance in order to assess the
possible profitability of a transaction before opening a position.
From a psychological perspective,
trading over prolonged time intervals is less stressful to a trader. This
also eliminates the need to
frequently use a terminal. This
makes trader's work calmer and
more comfortable, but the deposit
should have a decent margin of
safety for this tactic to work
adequately. When trading in the
long term, you can get into a
prolonged drawdown — a position
may take a long time to form.
15
The main thing to decide is how you
will behave in the market and
manage your position. You should
do that before you start trading for
large amounts.
Trading plan
The main thing to decide is how you
will behave in the market and
manage your position. You should
do that before you start trading for
large amounts.
16
Here are a few parameters that
every trading plan should have:
• List of trading instruments.
• Money management parameters.
(stop loss, take profit, lot size,
margin to main deposit ratio, spread
and swap sizes)
• Trade parameters based on trade
type.
(operational timeframe, time in
position)
• Trade entry parameters.
• Principles of managing a trade in
the moment, position exiting rules,
selected trading session.
Pay close attention to trade management in the moment. This is tied
to exiting from a position.
17
You can exit an open position in
several ways:
• by closing the deal manually;
• when your take profit is triggered
• when loss has triggered your stop
loss
• you are still in the black, but your
stop loss is triggered.
Whenever you start a trade, you
should already know how you will
behave when you are in a position.
You should know in advance all stop
and take parameters, and whether
trailing stop will be necessary.
Trailing stop is an algorithm
controlling the stop loss order. In
layman's terms, it is a sliding stop
loss.
18
It is located at a certain distance
from the asset's rate and moves
with it if market moves in the direction you need.
Here's how trailing stop works:
• If profit for an open position has
not exceeded trailing stop value, do
not take any action.
• When profit for an open position
exceeds trailing stop value, send an
order to the server to place a stop
loss order at trailing stop distance
from the current price.
• When receiving a quote at the
distance from the set stop loss
exceeding the trailing stop value,
send an order to the server to
change the level of this order to
relocate it at the trailing stop value
19
distance from the current price.
Before entering a position, you need
to decide whether we will trail the
stop along with the price, thus
protecting a part of the profit, or use
a trailing stop.
20
Managing
the capital
Many novice traders often have an
overconfidence problem. They trade
without setting stop orders. Some
people say that you do not have to
set a stop loss. Why fix the loss if
the price will eventually roll back,
and you will be able to return to zero
anyway?
However, practice demonstrates
that trading without stops always
entails a partial or full loss of funds.
Learn to cut your losses while
letting your profits grow.
In addition to eating up funds, a
prolonged drawdown may cause a
serious psychological problem.
21
We believe that the potential profit
to potential loss ratio should hang
around 3/1. Sometimes we can go
as high as 10/1 on a specific day,
which depends on the way we
opened that period. But what about
that comfortable prospect of
getting to net zero?However,
practice demonstrates that trading
without stops always entails a
partial or full loss of funds.
Learn to cut your losses while
letting your profits grow.
If we risk 50 points for a profit of
150 points, there is a 70% chance
that we will fail, but we will still
retain our original amount.
22
When you lose, however, you gain
valuable information on how to
improve your trading system,
because this loss means that your
current algorithm is inefficient. You
can correct your strategy and
achieve a better financial result.
23
Market entry
principles
Defining the trend
To make a stable profit in the
market, you need to adhere to an old
and simple rule of technical analysis — trade with the trend. There are
some techniques for different
vectors of trading that do not
depend on overall picture.
However, here we will focus on rules
that will secure a stable profit and
preserve the deposit.
Now, before we open a trade, we
have to figure out the trend of your
chosen currency pair.
24
The trend is a steady progression in
price along the same vector.
There are three main movement
vectors:
• Bull trend: price is growing
• Bear trend: price of the currency is
dropping
• Flat, or a sideways trend. Price
movement cannot be unambiguously determined in that position.
Important: a distinct trend meets
the following conditions.
See Figure 1.
MAX1
MAX2
MIN3
MIN2
MIN1
Figure 1
25
In a trend, each subsequent maximum and minimum should be a
technically sound trade entry point.
For instance, the chart in Figure 1 is
not a trend. In this case, MAX2 is not
above the MAX1, which means that
starting buying at MIN3 would be a
mistake.
MAX2
MAX1
MIN3
MIN2
MIN1
Figure 2
A classic scheme of an upwards
trend is shown in Figure 2. All
succeeding MIN and MAX points are
above the respective preceding
points.
In this case, it is recommended to
start buying at MIN 3.
26
Bull trend
MAX3
Resistance line
MAX2
MAX1
MIN4
MIN3
MIN2
MIN1
Support line
Figure 3
This type of price progression is
defined by each maximum and
minimum of the price being higher
than the previous one, which is a
classic definition of an uptrend.
27
Bear trend
MAX1
MAX2
Resistance line
MAX3
MAX4
MIN1
MIN2
MIN3
Линия поддержки
Figure 4
This figure shows a schematic
example of a downtrend, where each
maximum and minimum of the price
is lower than the previous one.
Flat, or a sideways trend
28
Resistance line
Support line
Figure 5
In this case, it is difficult to identify
any clear trend. If a trend is difficult
to define, you are most likely facing a
“sideways trend”. Sometimes it is
also called a price consolidation
period.
"Sideways trends" appear when the
market is ready to turn. More often
than not, they manifest as a short
pause in the ongoing trend. The
trend may resume after a period of
sideways motion.
29
In a rising (bullish) trend, only
purchases are made, and in a
bearish trend, only sales are made.
Trend trading is one of the most
profitable strategies. Even if you
rush into a deal, the trend will eventually pull you back into the black.
Position opening point
A novice trader has to learn an
important timing skill that will help
him/her enter the market at the right
time.
Sometimes the amount of knowledge is so big, it needs to be filtered.
You have to be in the right headspace when entering the market,
30
otherwise you risk losing control and
suffering losses.
To avoid that, you have to look for
and recognize signals that indicate a
good time to open a position. What
exactly will be the reason to open a
position depends on the trade type
and market analysis method. However, trade opening principles should
be identical. Ideally, you should have
a universal approach.
Important:
If you have two entry conditions fully
formed, and the third is just about to
form, you should postpone the trade.
31
It is obvious at first glance, but in
practice we tend to pass something
for a fact when it is not a fact.
An optimal entry point can be found
using support lines and resistance
lines. Experienced traders recommend adhering to these two principles:
Principle one:
32
Connect the candlestick shadows
with each other. Our objective here is
to create a trend line by connecting
price
maximums
and
price
minimums. To do that, you have to
draw the lines through the candlestick shadows or wicks.
Once you have made sure that each
subsequent
maximum
and
minimum supercedes the previous
one, you have an uptrend.
Connect MIN1 and MIN2 points,
and you will have a support line.
Open the purchase at the point
where the price chart and support
line intersect.
33
Draw a resistance line in a similar
fashion by connecting price maximums.
The figure below demonstrates the
way you should draw resistance
lines and support lines for a downtrend. For this type of price movement, the resistance line will be the
main one.
In this case, sell deals should be
opened at the point where price
chart and resistance line intersect.
34
Principle two:
After you plot trendlines across the
shadows of candlesticks, plot another set of trendlines across closing
and opening prices. This way, you
will cut candlestick tops.
Use these methods to obtain accurate data for successful deal starting!
35
36
Monitoring the market
When building levels, it should be
considered that the existing trend
will not stay within these boundaries
for a long time. The market is a living
organism. Like all living things, it will
occasionally surprise you by deviating from the expected trajectory.
Trends that last from a couple of
months to a year are bound to
change their trajectories eventually.
This does not mean, however, that
the trend itself ceases to exist — it is
still there, simply proceeding at a
different angle.
37
Let us imagine for a moment a ball
that is kicked off the ground by a
soccer player. The angle at which it
flies will eventually change, and the
ball will hit the grass on the field. It
will bounce up and down, and then
roll on the ground. Traders should
keep an eye on trend trajectories
and adjust their support and resistance lines accordingly.
That is how a trader finds better and
more convenient entry points for a
given time.
Changes in trend trajectories can be
tracked by certain signals: false
breakouts will occur, and price chart
will puncture the trend line.
38
When a false breakout or a puncture
occurs, a new minimum or maximum is formed. Use these points —
adjust existing trendlines and plot
new ones. This combination will
give you ranges to open a trading
position.
Be prepared for the fact that the
price chart often fails to reach the
trend line you built, or slightly
exceeds it.
Occurrences like that might confuse
a novice trader. But the constructed
price ranges will help you spot the
right time to open a deal.
39
What should you do if the price
chart has broken through your
trend line?
In this situation you might be asking
yourself whether you should start
the trade or abstain from opening
your position. If you have identified
the budding trend on an elder time
interval and you trade in its direction, then the price chart that havs a
minor breakthrough through your
trendline should not keep you from
making the trade. Remember: trend
is your friend. Follow it, and you will
succeed in the end!
40
Analyzing world events
Let us dig a little deeper and see
where future trends come from.
After all, they do not just come out
of the blue — they are created by a
convergence of a few macroeconomic factors. These factors, in
turn, have an impact on the redistribution of capital flows.
The primary “wave” is created by
publication of macroeconomic
indicators in reports from governments or independent organizations. These reports extensively
describe the state of the national
economy. Trade decisions can be
made based on the performance of
certain indicators.
41
These indicators are published at
certain times and guide the market
directly.
Economic calendars include large
lists of regularly updated statistics
arranged by day of the week and
country. Information from various
sectors of the economy is received
daily; inflation data, industrial sector
data, real estate market data, banking sector status data, etc. All that
should be taken into consideration
when you create your trading plan!
That is way too much data to keep
in your head simultaneously — you'll
just get tangled up in all these data
strands and develop a passionate
hatred for fundamental analysis.
42
To avoid confusion and be happy
with your work, you should arrange
the key marcoeconomic indicators
in a chart. It will help you see the
main tendencies in national economy to define the current trend and
predict an upcoming one.
This way, we are about to make a
smooth transition to fundamental
analysis. It is vital for successful
trading and reveals things the
technical methods will not detect.
For instance, technical analysis is
simply unable to account for global
economic state; it also detects
some indicators with a significant
delay.
43
With a macroeconomic data chart
at hand, you will put together a
valuable puzzle of signals, indicators and fundamental analysis.
Only follow the most important
statistical updates and pay attention to speeches given by heads of
central banks. Read between the
lines. In their reports and press
conferences, heads of the central
banks comment on current values
of the main indicators: CPI (Consumer Price Index) — index of
inflation, unemployment, GDP. From
that, you can discern the course of
action they are going to take and
make a profit in your trades!
44
We have thus established that
market trends are created with
central banks' influences. Central
Banks define the value of currencies, which influences the flows of
capital, i.e. creates trends. Thus, to
correctly estimate ongoing flows
and predict possible changes, you
should closely monitor the actions
of Central Banks.
Central Banks draft their policies
based on incoming macrostatistics.
If the economy is performing poorly,
Central Banks take measures to
reinvigorate it, using the available
instruments.
The
instruments
include:
45
— increase or decrease in basic
interest rate,
— changes in norms of compulsory
bank reserves,
—
unconventional
stimulating
measures. For instance, QE (quantitative easing) programs.
Let's take a closer look at the
refinancing rate and QE programs.
We will review the way Central
Banks use monetary policy instruments.
We will take Federal Reserve
System (FRS; American Central
Bank) and how it handled the 2008
crisis as an example:
46
Major macroeconomic indicators
from 2008 to 2009 showed very
clearly that the US was in deep
crisis. Those indicators are
inflation data (CPI index), unemployment rate, and GDP.
• In October 2008, inflation (CPI
index) dropped to a negative value
of -0.1%. In Q2 2009, the main
indicator of economic activity (GDP)
also became negative and dropped
as low as -6.4%.
• By October 2009, the unemployment rate was 10.2%, although it
only amounted to 4.8% as recently
as in February 2008.
To combat the crisis, FRS used an
extremely low interest rate of
0-0.25%
47
for 7 years, and also applied a
three-round QE program. In other
words, FRS printed over 5 trillion
dollars in three stages. When main
interest rate was lowered to
0-0.25%, US dollar weakened
against all currencies. Also note
that global dollar decline was
observed at each of the three
stages of quantitative easing
program.
48
Conclusion
You have to come prepared if you
want to succeed at the exchange.
Before putting real money into
trading, analyze market charts.
Observe the behaviour of prices, try
plotting the support and resistance
levels. Look for trends in graphs
with different timeframes.
You'll find an optimal behaviour
strategy for the market and make a
better trading plan once you are
fully immersed in these processes.
Follow your trade plan to make
reasonable and systematic trades.
Your skills will improve, and so will
the quality of your trade.
49
You will learn to recognize when you
made a mistake, and when it was
market that deviated from the
projected course, which is more
often than not the case.
Regular practice will allow you to
open and close more and more
profitable trades.
Exchange offers ample financial
opportunities, but it also requires
commitment. Always keep in mind
that you are solely and ultimately
responsible for your trading result.
The good news is, all the profit you
make also belongs to you alone!
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